I would say to go for it.
If you want to do a phd, have the passion and interest and willing to commit to all a phd needs then why not?
Funding, especially at phd level, is always competitive, there’s nothing you can do about that. But for phds, you have research experience, in the topic area and it’s building on work you’re doing already. That a big positive in your favour.
Look at the criteria, and make the best case you can in these areas. At its basics, it’s showing knowledge, interest, passion and where this phd will fit in the bigger picture.
Having your current supervisor, and who’ll be overseeing the phd is in your favour. The ultimate decision will likely be made by a panel, but having someone make the case for you goes some way.
I’m currently up for a school-wide studentship funding (politics, so slightly different) and needed referees for my phd application. These were my supervisors I hadn’t been in contact with for years, I just sent a polite email and they asked to see my proposal and CV to be able to feel comfortable recommending me essentially to colleagues that I could do a phd. I have a 2:1 as well, and a merit in my masters so not incredibly academically strong. I have work experience around research, but not directly and not in the area of my proposal. I might not get it, (only two people in the wider school can) but it’s at least going to the panel. I’ve not lost anything more than the time to write, and can say I had a go at it.
Ultimately, what have you got to lose? Some time into writing the application etc and if you don’t get it, no harm no foul. Can always try again another time but definitely put the strongest case forward. Be confident and strong in yourself and your abilities, and that will come through in the application. talk it through with your supervisor , who’ll be able to give guidance and pointers but remember, they can’t do it for you. Also, only do it if you really really want to do the phd, are really interested, are willing to commit as needed to making it as successful as you want it to be. You’ve got a stronger case than you might think.