Only you can really answer this question, by asking yourself these questions:
Do I plan on sticking with the same phone for two years? If yes consider the contract, if no take the PAYG route then when you get board you can take out a new contract to get a new phone.
How much per month would I spend on PAYG? If it's a similar amount to the contract then the contract is the better option.
If I was you with whichever option you choose I would get it from somewhere like the carephone warehouse. That way the phone will be unbranded and unlocked. This will mean you get updates quicker and will be easier to sell on. Avoid buying it from three, if fact avoid their rubbish network full stop!