I've never really bothered with magic in any elder scrolls game, but every time I have dabbled with it, I've always been confused by the "up to level x" that seems to apply to several spells. And that in turn has put me off more.

My question is, is there any point in me taking illusion, when the maximum level I could ever affect is 25? Now I *know* there are some perks that make this level increase, up to 45 I think the real maximum is. But my concern is that I will forever be playing catch-up.
I'm worried that From levels 1-5 things will be a blast and I'll be fearing, calming etc. But then after that, every level I'll be trying to perk up Illusion to get access to the next levels of spells or apply boosting perks just so I can actually use them. I'm imagining scenarios where I have access to something like an "up to level 15" spell, and I then hit level 16, with everyone except basic animals being the same level around me.

Am I right in this? Is there another way?

You are right. That is exactly what happens as you progress. If you don't plan on investing in Illusion perks, don't bother with it. Beth specifically designed the new magic system that way, so that people who don't invest themselves into magic don't use it.
On a second note, if you plan on manipulating only minions of stronger mobs, its worth a shot, since those appear as well, though less frequently on higher levels.

So basically, once I hit level 46, all of my Illusion spells (fear, charm, frenzy etc) become completely useless and wont work?

No. If you invested well in Illusion, they become useless only against the bosses that are 1 per dungeon. Level-scaling doesn't work THAT drastically!