You’ll need to quit the iOS update, then start over the setup.
When you restart, don’t transfer your data from your old iPhone or from the cloud.
You’ll then be able to use the phone but it won’t have your apps or anything on it. Which is fine, for this step the only thing you need to do is update the iOS. You’ll need to go to settings and update the iOS from there.
Once the update is installed, you need to then need to go to settings and go to to General>Transfer or Reset iPhone>Reset. (It was either that or “erase all”. I can’t remember which)
From there the phone gets wiped (except the iOS). It’ll prompt you to set up the iPhone again. You’ll can then either choose to transfer your data from the iCloud or your old iPhone and you should be set to go without having to update the iOS because you already did that successfully before you wiped it.
If at any point you find yourself updating the iOS in the initial phone setup, you’ll have to quit the iOS update and start again. You can do this by holding down the power button.
This is a dumb terrible workaround and Apple should absolutely have fixed this by now. It’s completely unacceptable.