Hello AppleHKuser,
Welcome to Apple Support Communities. We understand your Apple Watch and iPhone aren't unlocking after updating them both to the latest OS updates (watchOS 7.4 or later, iOS 14.5). First, check the settings required in this article:
Unlock your iPhone with Apple Watch when you're wearing a face mask
Pay specific attention to if your devices still meet all the requirements (like Wi-Fi and Bluetooth are enabled), and that your Apple Watch is unlocked while on your wrist.
Next, if you still aren't able to unlock your Apple Watch with your iPhone, restart both devices then try it again.
How to restart your Apple Watch
Restart iPhone
Have a good day!