According to O2 CS may PAYG sim is not 3G enabled, yet I am posting this in 3G mode.
Will anything get flagged up if I carry on or does the system not know or care which I use?

It means you wont be able to use video calling or 3g speeds for surfing.

They wont care

As far as I can tell, surfing seems to be 3G, but video calling is disabled.

My 3g phone (k850i) wouldn't register on o2's 3g network before I replaced my sim card with a 3g one. Up until then, it would only use 2G + EDGE (which is pretty speedy anyway for web browsing). The only company who'll really care about 2g/3g is Three - they don't pay half as much when you use their 3g network as when you roam onto Orange's 2g one in areas where they don't have 3g coverage.

A 2 or 2.5G SIM doesn't contain the correct authentication keys for the phone to be able to connect to a 3G network. I can't see how it is possible for you to be using 3G. The only thing I can think of is that the phone is mis-reporting how it is operating or O2 are mistaken. Which phone have you got and what network indicator is showing?

I'm using a Nokia N73 on the O2 network and the 3G indicator is showing. My sim is over a year old.