I want to restore my phone, but unsure if it'll let a giffgaff sim activate it when I do? It works fine with it now..

Yes, it will activate fine.

Cheers. Will the giffgaff sim make the phone realise it's unlocked also? Tesco did it ages ago for me. Or would I need to use a different network to o2?

Probably not but since 5.1 on a full restore through iTunes it should pick it up with any sim card. Even a tesco one.