AIBU to put money in pension as I get WTC?

[Snowcosmia]

I'm self employed (care & gardening) with low profits and currently receive Working Tax Credit. I had to take some time off this year due to a minor injury at work. This made me realise how vulnerable I am to injury through lone care work so I have started developing the gardening more which has had some extra costs so less overall profit than last year (but much better long term prospects).

To my surprise I recently got a refund from a very old mis-selling thing which included a payment of interest. As I understand it the interest is rightly counted as income for tax and Working Tax Credit.

I want to put half this payment into my very tiny pension savings which I haven't added to for years. Although it wasn't the plan the other half more or less covers the cost of the extra equipment and unpaid time off due to injury.

Once everything is added together my income for Tax/Tax Credits will be higher than last tax year.

AIBU to put money into the pension considering it reduces my taxable income? My childcare costs will be going down when DC starts school in September.

(Or have I misunderstood the system?)

I've found the letter from the PPI claim, (good filing system here!) which clearly states that interest received from ppi refunds are paid net of tax BUT are classed as income. This was 2016/17 tax year. I doubt it will be classed as interest under the £1000 savings interest limit, as it's not savings interest.
The refund of the insurance premiums you paid are an entirely separate thing- you've already paid the premiums out of income that's already been taxed so that doesn't need to be included on your tax return. This is assuming it's something like a PPI claim.

On a slightly separate note regarding pensions, should anyone be reading this there is interesting information re pensions that might be of interest. Bear in mind that the following info DOES NOT APPLY TO EVERYONE AS IT DEPENDS ON THE PERSONAL CIRCUMSTANCES, INCOME, AGE, TAX POSITION ETC.

If you pay into a private pension, the government pays into it in tax relief. For example, pay in £1000, they top it up with £250, paid straight in, no need to claim it, done automatically. I wish I'd known earlier.

The £1,000 0% tax band interest (£500 for higher rate taxpayers, nil for additional rate taxpayers) is for interest income, so PPI taxable interest would come into this.

For tax credits the first £300 of other income is disregarded.

For both purposes you have to take your total income from all sources, then they are taxed or assessed for tax credits accordingly, with whichever tax rates or allowances apply.