How can I create sub-folders in Photos

Here is one of many equivalent ways:

Click on the outer folder that is to contain a nested folder.

Pull down the Files menu and click New Folder.

A new nested folder appears with the name "Untitled Folder" selected.

Type over the name to rename it and hit return.

You're welcome 😊 This can be a bit confusing, if we have been using apps, where photos are stored in folders.

This part of the user guide is explaining a bit more:

What are albums in Photos on Mac? – Apple Support (UK)

Group albums in folders in Photos on Mac – Apple Support (UK)

Just remember, that folders can only hold subfolders or albums, but not photos or videos. To organize your media items in Photos, add your photos and videos to an album, not a folder. Then organize your albums by grouping related albums by folders and subfolders. You cannot create subfolders in albums either. The albums with the photos are at the bottom of the folder hierarchy, contained by folders. Marks screenshot is showing nicely the nesting hierarchy, with the albums as the leaves at the bottom of the tree.