Why does

iPhone storage refers to the local capacity on your phone and does not reflect the storage available in the cloud for your account.

If you want to only store your photos on the cloud & not on your phone, you'll have to go to Settings > Photos > Optimise iPhone Storage.

It'll then prompt you to Remove from iPhone or Download Photos & Video.

Choose Remove from iPhone.

Because iCloud storage has nothing to do with phone storage.

iCloud storage is for syncing, it does not increase the storage size on your phone.

What's the difference between device storage and iCloud storage? - Apple Support