What does stty's iutf8 actually do (effect)?

["Dan B." <danb@kempt.net>]

The manual page for stty says that the input setting "iutf8" controls
whether to "assume [that] input characters are UTF-8 encoded."

What does setting actually do?

(I understand UTF-8 and its mapping between byte sequences and characters.
What I don't know is where character decoding and encoding are done in
Linux input and output components (virtual consoles, xterm/etc., tty
devices).)

What does that iutf8 setting actually affect?

Is the terminal (tty?) driver involved in decoding the input byte stream
into characters for the process attached to the tty device?

Or does the driver decode bytes into characters only for its own
checking for special characters (e.g., for stty intf CHAR)?

Thanks,
Daniel