IPhone used space and available space are far from adding up?

On my phone it says 12gb used space and 1.5gb available but I have a 16gb phone, while leaves a 2.5 gb space gap. Does iOS take up that much space on its own or is something wrong?

Yes, your iOS takes up this space. And if you update your iPhone to a newer iOS, you might see it taking up even more space. When I updated my iPhone to iOS 6, from iOS 5, I saw my phone taking up more space.