The upgraded storage you paid for is for backing up what's on your iPhone. However, you iPhone has a finite storage capacity which is not increased when you upgrade the iCloud storage. You will need to delete unnecessary/unneeded photos and applications in order to free up some space. Be sure to backup the iPhone prior to deleting those files to make room.
The following is from this Apple document: iCloud: iCloud storage and backup overview
You have important information on your iPhone, iPad, and iPod touch. iCloud automatically backs up your device over Wi-Fi every day while it’s turned on, locked, and connected to a power source. With your device information backed up in iCloud, you can easily set up a new device or restore information on one you already have.
Here’s what iCloud backs up:
- Purchase history for music, movies, TV shows, apps, and booksYour iCloud backup includes information about the content you have purchased, but not the purchased content itself. When you restore from an iCloud backup, your purchased content is automatically downloaded from the iTunes Store, App Store, or iBooks Store. Some types of content aren’t downloaded automatically in all countries, and previous purchases may be unavailable if they have been refunded or are no longer available in the store. For more information, see the Apple Support article iTunes in the Cloud availability by country. Some types of content aren’t available in all countries. For more information, see the Apple Support article Which types of items can I buy in my country?.
- Photos and videos in your Camera Roll
- Device settings
- App data
- Home screen and app organization
- iMessage, text (SMS), and MMS messages
- Ringtones
- Visual Voicemail