Hi
Your iCloud storage plan does not extend the storage capacity of your iPhone (which cannot be increased).
If you are using iCloud Photo Library, the optimisation option can free up storage space on your iPhone by keeping space saving versions on your iPhone and full size originals in iCloud.
The following support article explains the difference between device storage (on your iPhone) and iCloud storage:
About storage on your device and in iCloud - Apple Support
Options for managing photos and freeing up storage space on your iPhone include:
Import photos and videos to your PC and delete them from your iPhone:
Enable iCloud Photo Library and turn on Optimise Storage.
- This frees up storage space on your iPhone by keeping space saving versions of all of your photos and videos on your iPhone and full size originals in iCloud.
- Files are optimised automatically, as required.
- Note that, when using iCloud Photo Library, deleting a photo or video on any device that is using the service also deletes it from all other devices that are using the service, including from iCloud.
- iCloud Photo Library - Apple Support
You may also find these resources helpful: