Are we only allowed 4 total colours, or just 4 colours on screen at a time?

What they said ^

Four colours on screen at one time. That means you can have different palettes between the pause screen and the main gameplay, for example.

Please don't take this to mean you can flicker the palettes constantly to make new colours, it looks awful.

THIS IS ANSWERED ON THE JAM PAGE/FAQ

this is only the first paragraph of the rant, but you can read the rest on the jam page linked above.

it might be helpful for you to look at past jam entries to get inspiration and an idea of what can be done with only 4 colors.

here are a few examples: