Hi David,
Welcome to the forum and welcome to Zen Cart.
The principle of the UK template is simple (if you understand the basics). The fact you have managed to set up your own server is a MAJOR acheivement - so Well Done sir!
Installed before installation begins
What this means is that you upload the UK Template files just after you've uploaded the main ZC files - and BEFORE you start the main ZC install process.
The Zen cart development team built in the functionality to include other contributions or modules at the time you install zen-cart.
As you found out, with the basic install you are given the choice of USA options and states when you come to set up your store. By installing ZC WITH the UK Template you will then have the additional options of UK counties to select.
Short of 'playing' and 'learning' how to 'hack' the UK Template to fit your existing store, as you are at the beginning it may be easier for you to re-install from scratch. That way I know it will work.
If you need more help or get stuck feel free to ask here.
... and don't worry about my space - I've got a few spare servers to fill 
Good luck
Kev