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iPhone PAYG has free wifi and data bundle for the first 12 months, £10/month thereafter. On pay monthly, its included in all iPhone tariffs for the length of the contract.
The free wifi relates to wifi points around the country, 9000-ish places in the cloud agreement IIRC. So can use the wifi in pubs, coffee shops etc within the agreement. This has no affect on your ability to use wifi at home, mates etc or anywhere you know the wifi login details. In places with no wifi, you use your data bundle to access the net. GPS is free.
I don't have a iPhone contract, I have a normal o2 pay monthly contract with unlimited data bolt, there is a wifi bolt on available but I don't want to pay for that. I bought my 3GS on PAYG but use my pay monthly sim in it. I can't use free wifi in pubs etc but I'll save £185 over buying a pay monthly 3GS