Connect your 'old' iPhone to your PC
Go to your iTunes account and sync as you always do. This will ensure everything is up to date.
(You may also need to have your iTunes log in details to hand for later!)
Now change over your SIM card from your existing iPhone to your new iPhone. This will enable you to activate your new device onto your existing account.

Connect your 'new' iPhone to your PC and go to your iTunes account to start the activation
Select 'Existing Customer' and enter your mobile number. (iTunes may ask you for your iTunes account log in details here)
You will be told that your new iPhone is activating
Contact O2 Customer Services on 2302 to reset your MAC address to enable you to use Wi-Fi on your new iPhone.
Your new 16GB iPhone is ready to be used. Enjoy!!