Is it possible to pair your watch to an up to date iPhone so the watch OS can be updated, then re-pair back to my original iPhone (it's a 7 so IOS can't be updated further)

I think you are going to find the plan will not work because the updated Apple Watch software would not be compatible with the older software in your iPhone 7 when you tried to restore the original pairing. I am not sure if a full Erase and Re-pair to connect the watch back to your iPhone 7 would be able to downgrade the watch software for compatibility, but that would defeat the purpose of your efforts. You are correct that the risk is a watch which can only pair to your work phone.

I will also bring to your attention the iPhone SE which seems to have a very attractive price in most regions, and would be a good budget cost upgrade from your iPhone 7. My work provided one recently as a replacement for an elderly iPhone 6S, and I have found it to be a very capable and acceptable iPhone.