Preheat the oven to 375 degrees . Grease a 24-cup mini-muffin pan. In a large bowl, whisk together the flour and baking powder; whisk in the milk and egg. Stir in the mozzarella and pepperoni; let stand for 10 minutes.
Stir the batter and divide among the mini-muffin cups. Bake until puffed and golden, 20 to 25 minutes.
Meanwhile, microwave the pizza sauce until warmed through, then stir in 1 tablespoon basil. Sprinkle the puffs with the remaining 1 tablespoon basil. Serve the puffs and red pepper slices with the pizza sauce for dipping.