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You can form it if you have >50% of the counties in your realm, and then keep it for yourself. Giving it away would indeed make the new petty king independent.
Only when/if you become an Actual King, you can grant the Petty Kingdom to someone and keep them as a vassal.
Also, if you want more taxes, try to modify the feudal contract...keep in mind that Feudal vassals don't give much money in general though, they are mostly only good for levies.
If the areas are recently conquered, the control of the counties is going to be very low, which massively impacts taxes levied from holdings in said county.
That said, taxes from vassals aren't exactly mindblowing early on, even less so due to factors such as "not rightful liege" as you've discovered.
That said. Creating the Duchy of Mercia is not going to create a separate kingdom, as long as you hold the title.
If you have Confederate partition and at least 2 inheriting sons, your kingdom is going to be split anyways, once your current character dies. If you have regular Partition, then not creating the title would keep your kingdom together when your current character passes, but you'll keep the associated penalties of not being the rightful liege of the Mercian vassals.