A deemed employment payment is the mechanism by which inside-IR35 income is converted into something taxed broadly like employment income. What actually happens depends on which regime applies to the engagement.
Under Chapter 10 (medium or large client), the fee-payer treats the payment to the PSC, after deducting any VAT and the direct cost of materials, as a deemed direct payment. It operates PAYE and employee Class 1 NIC on it, and pays employer Class 1 NIC at 15% plus the Apprenticeship Levy on top, before paying the net to the PSC. There is no 5% expenses allowance under Chapter 10.
Under Chapter 8 (small or overseas client), the PSC self-assesses and computes a deemed employment payment at year-end. It takes the total relevant engagement income, deducts a flat 5% of that income as an administrative allowance (retained under Chapter 8), then actual allowable expenses, employer pension contributions and any salary already paid, grosses down for employer NIC, and treats the balance as deemed salary subject to PAYE and NIC. The 5% allowance is the key difference between the two regimes. The statutory hooks are ITEPA 2003 s.61N (Chapter 10) and ss.54/58 (Chapter 8).