Assuming that you wanted a 32GB iPhone with 600 minutes per month, unlimited texts, and unlimited internet, and that the comparison is with a 2 year contract, the figures show that the contract option actually costs you £10 less, but two years is a hell of a long contract IMHO.
2 Year Contract:
Cost of iPhone - £179
'Line Rental' - £849
Total: £1,019
I've been looking at Orange contracts and the prices are similar:
24 month contract (600 min, unlimited texts, 'unlimited' data):
Cost of phone - £179
'Line rental' - £840
Total £1019.
18 month contract (600 min, 500 texts, 'unlimited' data):
Cost of phone - £280
'Line rental' - £630
Total £910
Of course with the 18-month option you only get 18 months of calls, texts and data so adding in another 6 months of £25 a month (this is what I currently pay for the month-to-month 600 min, unlimited texts, 500 MB contract I'm on) gives a total of £1060.
Rather surprisingly then I think I might be going with a 24 month contract. I'll buy the 2011 iPhone in the middle of this PAYG, plonk that on the contract and give the 2010 iPhone plus the PAYG data to the good lady. This is similar to what we did when I went from 3G to 3GS (except I had an 18-month contract then) and it seems to work - I get to feed my addiction and the CFO gets a phone and data