I currently have WINE installed on an Ubuntu 21.10 install from the primary repos, and it reports its version as wine-5.0.3 which appears to be a bit dated versus what WineHQ shows as current. WineHQ suggests uninstalling the version that comes from repos and loading their PPA (https://wiki.winehq.org/Ubuntu) to be more up to date - that all makes sense, my question is: will this negatively impact already installed applications/existing prefixes? Or put another way: how will this impact/interact with already installed applications and existing prefixes?

Usually no. Wine is pretty stable by this stage. But, like always, that's not a guarantee. I say that because of the version numbers. The standard numbering system is 'Program-x.y.z' where

1. Z = bugfix type release, nothing meaningful added.
2. Y = Feature additions.
3. X = Break in compatibility.

So when you go from wine-5.x.x to wine-6.x.x, that's a compatibility break. I did it more than once, and got away with it each time. But the more features you're using, the more errors are likely. It would be worth consulting the ChangeLog to see what actually changed. IIRC, some directory names changed or moved about.

Upgrading just updates the binary package in linux. When you start wine, it notices that everything in your user account is out of date, and grabs the latest kit. So start it with 'winemine,' or something innocuous.