The Chancellor boarded the train to Euston at Wilmslow, Cheshire on Friday afternoon, before settling into first class with his special adviser.
But he was then challenged by a ticket collector who refused to allow the Chancellor to remain in his premium-priced seat - unless he paid the extra.
His special adviser reportedly said Mr Osborne, the third most senior minister in the Government, could not possibly remove himself to sit among the general public in standard class for the two hour journey to London.
The embarrassing gaffe, described as a “stand-off”, was observed by ITV reporter Rachel Townsend who tweeted the exchange between the Tory MP and the ticket collector.
Ms Townsend tweeted: “Very interesting train journey to Euston Chancellor George Osborne just got on at Wilmslow with a STANDARD ticket and he has sat in FIRST CLASS.”
She told ITV: “George Osborne got on the train with aides at Wilmslow and went straight to first class.
“Then his aide approached the ticket collector right next to me. He said he is travelling with George and he has a standard ticket but can he remain in first class?
“The guard said no. The aide said Osborne couldn't possibly sit in standard class. The guard replied saying if he wants to stay it’s £160.
“The aide said he couldn’t pay and he couldn't really sit in standard. The guard refused to budge.
“The guard went on gathering tickets and later told me Osborne had agreed to cough up the £160.”
