I rang up about that. Basically the deal is:
If you last upgraded your phone before September 18th 2007 (which you did I'm guessing if you're due to expire in Xmas 2008), then you can sign up for a new iPhone contract and your existing contract will be scrapped without any fees.
If you last signed a contract with O2 AFTER September 18th 2007 then you have to pay to get out of that contract... or take the iPhone contract out separately.. stupid I know