Are Honor and Palmer really lovers, or is the scene where Martin discovers them in bed simply a set-up, like the story of Gyges and Candaules?

Honor and Palmer are involved in an incestuous affair. The Severed Head is a satirical work written to display the tangled sexual relationships existing between the six main characters.
It is clear that the encounter is real rather than a set-up because of the ways that it affects Palmer's behavior. Martin discovers the affair between Honor and Palmer because he has fallen in love with Honor and is seeking her out. Palmer has a longstanding secret relationship with Antonia, Martin's wife. Martin does not tell Antonia of the relationship between Honor and Palmer, but Palmer assumes that he has and acts so strangely as a result that Antonia decides, for the time being, to take Martin back.
Despite the astonishing speed at which these relationships kindle and dissolve, the narrative of The Severed Head gives every indication that they are all very real—if confusing—sexual relationships.