My iphone cannot update due to "Not enough memory" But I am paying for 200 GB of icloud storage?

iCloud storage can help in a limited way with a shortage of storage on an iPhone. See the information in What's the difference between device storage and iCloud storage? - Apple Support including the following:

Free up space on your device

Using the steps above, you might see a list of recommendations for optimizing your device storage, followed by a list of installed apps and the amount of storage each one uses. Tap an app's name for more information about its storage. If you don't see any recommendations, try these steps:

• If you use iCloud Photos and turn on Optimize Storage, you can lower the amount of storage that your photos use on your device. 
• You can remove content from your apps like photos, music, and podcasts. 
• You can delete apps that you're no longer using.

Learn more about how to optimize the storage on your iOS or iPadOS device.

Even though you are paying for 200 GB of storage on iCloud, that is a separate storage drive from the iPhone itself. So you're going to want to make sure that everything possible is synced/uploaded into that iCloud storage drive first. Then, you're going to need to clean out a lot of stuff from your phone. I recommend deleting the pictures and videos from your phone's storage and just leaving them in your iCloud Photos. Also, a great thing that you can do that I do on all of my iOS devices is to allow it to automatically remove apps from your phone that you rarely use. The icon remains on your desktop and so if you want to use that app, just tap it and it will reinstall. To do that, go to settings, app store, and turn on the switch for "Offload Unused Apps."

The iCloud storage isn't the problem, the problem is that the device itself has too much on it.

After you update it, restore everything you need.

Hi!

iPhone installs updates directly on internal storage, since that is where it is being run. You cannot install updates in iCloud storage, no matter how much you are paying for. iCloud storage is used for photos, files and backups. You will have to reduce the storage on your iPhone, since it cannot be changed. It was configured when you bought the device. You can see your storage usage by going to Settings > General > iPhone Storage. There will be the breakdown of the used storage and recommendations for how to reduce it.

Hope this helps!