How does sync affect storage on iPhone and iCloud?

So if I’ve got an iPhone with 256GB storage and 1TB iCloud storage, and my phone storage gets full I will still need to delete stuff on my phone, what happens during sync does it then delete on both the phone and iCloud? And does this mean even though I Pay for 1TB of storage I’ll only ever have access to 256GB because my phone can only have content equivalent to 256GB?

[Re-Titled by Moderator]