iPhone vs iCloud Storage (Apple Photos)

That's the way iCloud photo works. It is not independent storage for photos. It is a synchronization service to sync photos from one device across all your devices. So your photos always live on both your device(s) and in iCloud. If you delete them on your device, you delete them in iCloud, and that deletion then sync's across all your connected devices.

You can turn on Photo Optimization to reduce the file size of your photos on your iPhone to release some space.

Go to Settings->General->iPhone Storage and see if it offers the option there.

Or go to Settings->Account (top of settings)->iCloud->Photos->Optimize Photo Storage

More details here under "Save Space on your Device": Set up and use iCloud Photos - Apple Support